In July 2014, FINRA announced that INTL FCStone Securities Inc. submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured, fined $70,000, ordered to pay $62,297.13, plus interest, in restitution to customers, and required to revise its Written Supervisory Procedures. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to contemporaneously or partially execute customer limit orders in over the counter securities after it traded each subject security for its own market-making account at a price that would have satisfied each customer’s limit order. The findings stated that the firm’s supervisory system did not provide for supervision reasonably designed to achieve compliance with respect to the applicable securities laws and regulations, and FINRA rules, concerning customer limit order protection.
FINRA Disciplinary Action Against Blackrock Capital LLC
In July 2014, Blackrock Capital LLC submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured, fined $50,000 and required to comply with undertakings and revise the firm’s Written Supervisory Procedures. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it charged its customers $60.50 on separate purchase or sale transactions in addition to or in place of a designated commission charge.
The findings stated that the firm characterized the charge on customer trade confirmations as “miscellaneous” and/or as an “additional fee.” A substantial portion of the $60.50 charge was not attributable to any specific cost or expense the firm incurred or performed in executing each transaction, or determined by any formula applicable to all customers. A substantial portion of the charge represented a source of additional transaction-based remuneration or revenue to the firm, and was effectively a minimum commission charge. By designating the charge on trade confirmations as “miscellaneous” and/or as an “additional fee” in addition to or in place of a designated commission charge, the firm mischaracterized and understated the amount of the total commissions the firm charged.
SEC Charges Five New York Based Traders with Short Selling Violations
On July 2, 2014, the SEC announced that it had charged five traders for committing short selling violations while trading for themselves and Worldwide Capital Inc., a New York based proprietary firm that earlier this year paid the largest-ever monetary sanction for Rule 105 violations.
Worldwide Capital and its owner Jeffrey W. Lynn agreed to pay $7.2 million to settle SEC charges in March for violating Rule 105, which prohibits the short sale of an equity security during a restricted period and the subsequent purchase of that same security through the offering.
On July 2, 2014 the SEC settled administrative proceedings against Derek W. Bakarich, Carmela Brocco, Tina Lizzio, Steven J. Niemis, and William W. Vowell for violating Rule 105 by selling shares short during the restricted period and purchasing offering shares of the same securities they had shorted. They purchased the offering shares through accounts they opened in their names or names of alter ego corporate entities at large broker-dealers and then executed the short sales of the securities through an account in Worldwide’s name at different, smaller broker-dealers.
Each of the five traders agreed to settle the SEC’s charges and pay a collective total of nearly $750,000.
According to the SEC’s orders, Bakarich, Brocco, Lizzio, Niemis, and Vowell were selected by Lynn to conduct trades for Worldwide Capital, which he created for the purpose of investing and trading his own money. The traders he chose to trade his capital pursued an investment strategy focused primarily on obtaining allocations of new shares of public issuers coming to market through secondary and follow-on public offerings at a discount to the market price of the company’s shares that were already trading publicly. They sold short the shares in those issuers in advance of the offerings, hoping to profit by the difference between the price they paid to acquire the offered shares and the market price on the date of the offering. From approximately August 2009 to March 2012, Bakarich, Brocco, Lizzio, Niemis, and Vowell each violated Rule 105 in connection with at least nine covered offerings. They received ill-gotten gains ranging from approximately $16,000 to more than $200,000.
Each of the five traders agreed to cease and desist from violating Rule 105 without admitting or denying the findings in the SEC’s order. They agreed to disgorge all of their ill-gotten gains plus prejudgment interest and pay an additional penalty equal to 60 percent of the disgorgement amount.